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Broker's Digest: A-REIT, UG Healthcare, UMS Holdings, United Global

The Edge Singapore
The Edge Singapore • 7 min read
Broker's Digest: A-REIT, UG Healthcare, UMS Holdings, United Global
See the analysts' recommendations and target prices here.
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Ascendas REIT
Price target:
RHB “neutral” $3.20
PhillipCapital “buy” $3.64

Mixed reactions to acquisition of data centres in Europe

Analysts from RHB Group Research and PhillipCapital are divided on their recommendations for Ascendas Real Estate Investment Trust (A-REIT), following its acquisition of a portfolio of data centres in Europe for $904.6 million.

RHB analyst Vijay Natarajan keeps his “neutral” rating but with a higher target price of $3.20, from $3.15 previously, noting that the acquisition will help A-REIT “gain a foothold in one of the most in-demand industrial asset classes”. He revised his distribution per unit (DPU) for FY2021- FY2023 by 1%-2% to factor in better-than-expected net property income (NPI), which underpins the higher target price.

Natarajan notes that the portfolio has an average NPI yield of 6%, which is higher than the NPI yield of 5.6% from A-REIT’s portfolio for FY2020 ended December 2020. “The acquisition is yield-accretive (+1.3%) to pro-forma FY2020 DPU, based on an equity-/debt-funding mix of 64%/36%,” he adds.

The data centres have an occupancy rate of 97.9% comprising high-quality tenants such as HSBC and EntServUK, with a weighted average lease to expiry of 4.6 years, with 9.5% of leases by rental income due in FY2021. Given management’s guidance that rental rates are in line with market rates, Natarajan does not see significant rental rate uplift in the near term, though he notes potential occupancy-rate increases.

With this deal, A-REIT’s portfolio now comprises 40% overseas assets, though Natarajan believes future purchases will be in Singapore, to possibly include Galaxis and the various science park redevelopment opportunities from its sponsor. Post-acquisition, gearing remains comfortable at 37.1%, providing more than $1 billion of debt headroom for acquisitions.

He is overall positive on A-REIT. But given P/B at 1.4 times, he is keeping his “neutral” call, suggesting that investors should look at undervalued cyclical sectors such as office, hospitality and retail as easier recovery plays.

Similarly, PhillipCapital analyst Natalie Ong has kept her “buy” rating. However, she has lowered her target price to $3.64 from $3.73. While Ong believes that the acquisition will strengthen A-REIT’s portfolio and notes that it came four months earlier than expected, the portfolio size is smaller than her projection of $1.5 billion, thereby prompting her to trim her DPU estimates for FY2022-FY2025.

Nonetheless, A-REIT remains her top pick for the sector in view of its scale and diversification. “A-REIT also continues to future-proof its portfolio by increasing its exposure to growth sectors of the economy: knowledge economies, technology and e-commerce,” she adds.

Ong also points out that the acquisition deploys the remaining 52.1% or $612.5 million of equity funds out of the total $1.2 billion A-REIT raised in November 2020. Besides the funds earmarked for the European purchase, the rest of the proceeds have been used for two Class-A office buildings in San Francisco and a suburban office in Sydney, Australia, which were completed in November 2020 and January 2021 respectively. “We forecast DPU growth of 10.6% for FY2021 as acquisitions and redevelopment/AEIs (asset enhancement initiatives) start contributing,” she says. — Atiqah Mokhtar

UG Healthcare
Price target:
RHB “buy” 75 cents

An attractive ‘buy’ even with target price lowered

RHB Group Research has maintained its “buy” call on UG Healthcare, but with a lowered target price of 75 cents from 95 cents on a new DCF methodology.

RHB’s analysts note that the glove-maker recorded “satisfactory 1HFY2021 results”, and that 1HFY2021 core net profit surged 69 times to $54.9 million due to better average selling prices (ASPs) and sales volume.

Its cash has increased to $43.9 million as of endDecember 2020, compared to just $9.3 million as of endJune 2020. Its total debts have declined to $11.3 million from $35.1 million, and UG is now in a net cash position of $32.6 million.

In addition, the company plans to add 500 million more pieces of gloves to its annual capacity by the end of next month. As the current capacity is 2.9 billion pieces per annum (ppa), UG’s total capacity will be boosted by 17% to 3.4 billion gloves ppa. For FY2022, the company plans to increase its capacity by 1.2 billion ppa to 4.6 billion gloves ppa.

However, RHB highlights that moving forward, it expects US$40 ($53.60) to be the long-term ASP for nitrile gloves. “As the US plans to build its own gloves manufacturing plants, we estimate that the cost of production will be at US$40. This should set the long-term global nitrile gloves price. When the ASP drops below US$40, US producers will stop producing, and in the long term, ASP should revert back to US$40,” they say.

Due to the lower estimated ASP, RHB notes that blended gloves ASP has been reduced to US$34 from US$45. “We assume the long-term volume mix to be 50% for nitrile and 50% for non-nitrile gloves. We believe the near-term high ASP will encourage more competition in future,” the analysts state. They note that UG is still “undervalued” and that at 60 cents, its share price is trading at 3.1 times FY2021 P/E. — Lim Hui Jie

UMS Holdings
Price target:
KGI Securities “outperform” $1.43

Further upside on semiconductor prospects

UMS Holdings’ 4QFY2020 earnings missed estimates. However, KGI Securities’ Kenny Tan has not only maintained his “outperform” call, but also given a higher target price of $1.43, from $1.22 previously.

The earnings miss was because of impairment at associates Kalf Engineering as well as JEP Holdings. That aside, UMS reported a 9% y-o-y increase in sales for the quarter, bringing full-year jump to 24.6% over the preceding FY2019. In addition, gross margins improved 40 basis points y-o-y to 53.3%.

Tan, in deriving his new target price, used a slightly higher P/E of 15 times and has also taken into consideration higher associate contributions expected, improved margins, and further clarity on its expansion plans.

Looking ahead, Tan is bullish on the semiconductor capital equipment industry on news of chip shortages. He also notes that UMS’ key customer, Applied Materials (Amat), has continued to provide forward forecasts that are above consensus estimates. Semiconductor systems’ forecast for 2QFY2021 ending April of US$3.85 billion ($5.17 billion) is now the highest ever in the Amat’s history.

Tan views that UMS management’s decision to cut dividend is in line with the increasing possibility of a new customer win, which will lead to further capital expenditure and improved revenue diversification. — Atiqah Mokhtar

United Global
Price target:
PhillipCapital “non-rated”

Three reasons to invest in United Global PhillipCapital’s research analyst Vivian Ye has identified three reasons for investors to invest in independent lubricant seller, United Global.

In her non-rated initiation report, Ye highlights that United Global intends to leverage United Oil Co’s (UOC) new joint venture (JV) with Madrid-listed Repsol’s international brand presence to expand UOC’s scale and reach. UOC contributed US$5.39 million ($7.23 million) to United Global’s net profit for the FY2020. Its revenue fell 18.2% y-o-y to US$89.7 million due to lower manufacturing average selling prices (ASPs) and trading revenue.

UOC was a 100% subsidiary of United Global before the latter divested a 40% stake to Repsol.

As it is, United Global currently has a network of distributors spanning 40 countries. In addition, the global lubricant market is projected to reach US$182.6 billion by 2025, from US$157.6 billion in 2020. According to Ye, this would translate to a CAGR of 3%.

The Asean region, where UOC derived about 55% of its FY2019 revenue, is expected to remain heavily dependent on lubricants, she adds. This is especially the case for automotive lubricants, as the region is “not yet fully industrialised”.

Lastly, United Global has ample means for expansion, with it being in a net cash position since its listing in 2016. As at Dec 31, 2020, the company has $9.7 million in net cash. It has also remained debt-free since 4QFY2019. “This puts United Global in a comfortable position to pursue future acquisitions or business expansion,” she writes. — Felicia Tan

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